Modern Monetary Theory, same old mistakes

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A radical 10-year plan which charts the course for a government takeover of the American economy has been proposed by the socialist wing of the Democratic Party in the United States. The “Green New Deal” is notionally about “combatting climate change”. It calls for 100 per cent renewable energy, replacing air travel with a national high-speed train network, and energy efficient upgrades to “all existing buildings in the United States”.

The plan also calls for a government imposed ‘living wage’, and government provision of food, water, healthcare, and education. And calls for action on climate change are a smokescreen for back-door socialism.

The plan represents nothing short of a government takeover of the private economy. It would divert resources away from productive investment towards social programs and impractical infrastructure projects. Savings and investment would be severely undermined leading to an erosion of economic prosperity.

Even if unconvinced of the economic consequences of the Green New Deal, proponents still need to explain how the government could possibly fund this unprecedented expansion of government spending.

Modern Monetary Theory has filled this role. Newly elected Democratic congresswoman and proponent of the ‘Green New Deal’, Alexandria Ocasio-Cortez, has appealed to MMT when asked about fiscal constraints. One of the most prominent advocates of MMT is a former economic advisor to for US Presidential Candidate Bernie Sanders, Stephanie Kelton. Kelton was recently in Australia advocating MMT and a government-funded job guarantee.

MMT suggests that government debt doesn’t matter when a country controls its own currency because money can just be printed to pay down the debt. The prospect of defaulting magically disappears. The role of government, under MMT, is to manage the amount of money in the economy through spending and taxation. Governments then become unshackled from the normal fiscal constraints and are free to pursue large social programs without worrying about the deficit or debt.

There is, of course, no such thing as a free lunch, even under MMT. When the government cranks up the printing presses to pay for spending this shoots more money into the economy. This results in inflation, which in reality is just another form of taxation.

When the price of everything rises, but incomes are the same and nothing extra is being produced, everyone’s standard of living takes a hit. It also destroys the incentive for investing. If money is worth less in the future then why not spend it all now? This means less capital stock for future generations, which means lower productivity growth, lower wages, and fewer jobs.

Worse, inflation is a hidden tax. It doesn’t appear on your payslip like income tax, or in your letterbox like the bill for your council rates. You only notice when you come home with less and less from your weekly grocery shop.

What has been so interesting, though, is how so many self-styled “experts” have jumped on the MMT bandwagon. This just raises questions about the use of experts and intellectuals. There has never been a shortage of experts to prop up unsound policy and provide policymakers with an air of sophistication and credibility. John Maynard Keynes, through the development of what become known as “Keynesian economics” provided intellectual cover for huge government expansion that followed the original New Deal in the 1930s. The Soviet Union similarly benefited from economic experts in the West who cheerled the totalitarian regime as millions of people starved.

When governments seek to engage in large-scale micromanagement, they rely on a supply of technocrats to tell the people with certainty how policy will play out without due consideration of unintended consequences.

In Australia, we have seen appeals to climate scientists on economic matters to justify government management of the economy.

We have seen lawyers frequently argue in favour of undermining fundamental rights, and commissioners installed to sit in judgement over what speech should be allowed in society.

Proponents of MMT will likely be wheeled out by their political overlords to justify a dramatic expansion of government at the expense of free enterprise. While advocates of MMT are a fringe group within economics, we can expect to see their profiles rise as politicians use them for their political ends.

Most people react to the ideas of MMT with an initial scepticism that results from a general distrust of schemes offering something for nothing. However, with socialist ideas again on the rise, creative theories are being employed to justify ideas that have failed time and time again. Despite the best efforts of experts, no amount of theorising will suspend the laws of economics.